PE versus HF Modelling: Differences?
Hi guys, currently in private equity and am curious to know the differences in PE modelling vs. HF modelling? Is the investment process/modelling fairly similar in HF investing or widely depended on which shop or MM vs. SM, etc.? Granted, I assume there's no LBO modelling really, how detailed are your 3SM models? What's the investment process like, is there a memo or just a deck used? Any info greatly appreciated.
Based on the most helpful WSO content, here are the key differences between Private Equity (PE) and Hedge Fund (HF) modeling:
Private Equity (PE) Modeling:
Hedge Fund (HF) Modeling:
Additional Insights:
Investment Process:
For more detailed information, you can explore the WSO Academy and its various courses on financial modeling, investment banking, and private equity.
Sources: https://www.wallstreetoasis.com/forum/investment-banking/modeling-in-hf-vs-pe-vs-ib?customgpt=1, What does a model look like at a L/S hedge fund? What is the diligence process like?, HF to PE post-MBA - my story and seeking advice (long-time poster)!, Difference between Hedge Fund and Prop Shop, AM vs HF: The Business of Our Business
MM investment process will look nothing like what you do in PE. We hired a PE guy a few years back to our pod and had to fire them in under a year because they couldn’t figure it out. A 10 slide deck on business quality and the debt schedule is not making me money week to week.
The honest truth for MMs is that it will depend. Pod next us doesn’t even model, we do really granular revenue and cost builds but then don’t model cash flows or balance sheets for most of our names. Others will still be doing a DCF for each stock because the PM wants a sense check tab.
How would one go about modeling for a stock pitch/interview? I understand that strategies for different funds will vary and appreciate different pitch/memo styles.
Thank you for the response! How does one shift the PE mindset then? What would the average hold period be for a long investment vs. short one? Are you constantly updating the model then?
1-3 months generally tends to be the skew. Sometimes you might have a compounder in there for a while, but you’ll usually still adjust the position across the trade’s cycle.
also this varies, there are pods that trade weekly views (and a lot of them) where frankly it feels like they’re arbing spec sales and trading positioning rather than fundamental views.
how do you trade it in? I have no idea. Seems like the PE guys are just model monkeys for the PMs that hire them, I don’t actually know how well they transfer into risk taking roles etc. my personal view is that a PE background isn’t value add for most PMs, it’s no different to hiring a kid out of banking.
How do i get a job at a pod that doesn't model / only does income statement light modeling - thx
Ignore my title, but I work at a LO. For us, unless you've been an analyst covering the sector for decades or a generalist PM, as a firm we typically like to input historicals ourselves, while it is time consuming it's very helpful to get a since of how the business has evolved by guying through Ks and Qs and reading MD&A, etc. At a certain point when you've been covering a sector for awhile, 2017 historicals don't really matter and could likely just use a SS model to get historicals. Idk anyone that doesn't manually input numbers for current quarterly updates.
Same here at a L/S shop. Mostly a manual process to better understand the business, drivers etc.
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